Indonesia struggles to take the brakes off slowing economy

Reading Time: 3minutesIndonesia’s formerly emerging economy has taken a hit from sluggish exports, high inflation and fewer investments.

Indonesia’s President Joko Widodo believes that now is “the best time to invest” in the country despite its current economic problems. During his first official visit to Singapore end-July, he recalled moments of Indonesia’s crisis in 1997 and claimed that many investors – including many Singaporeans – who stayed invested have gained huge profits today.

By Christin Huang

He advised more than 150 business leaders at an event to “invest early” in Indonesia, as a “new economic cycle is beginning.”

“The social media revolution has begun. The smartphone revolution has begun. Around the world, around the region, and yes – also in Indonesia,” he proclaimed.

But it’s hard for many investors to ignore Indonesia’s lackluster economic performance, especially compared to some other soaring economies in the region. Indonesia posted growth of relatively disappointing 4.7 per cent in the first quarter of 2015, setting the nation off course to meet the International Monetary Fund’s 5.5 per cent growth forecast for 2015.

The relatively low GDP growth rate for Indonesia as a once strongly emerging nation is the result of the strengthening US dollar, weak exports and high domestic interest rates, according to Suryamin, Head of Statistics Indonesia (BPS).

Moreover, Indonesia’s weakening exports are seen as a symptom of the global economic slowdown, as particularly the recent weakness in China – which accounts for one-tenth of Indonesia’s exports – has led to negative side effects, with Indonesia’s exports to China dropping to 7 per cent from 7.4 per cent in the first quarter of 2015. Coal, natural gas and palm oil exports have all been hit.

Widodo predicts that exports will remain weak, but he sees investment opportunities in infrastructure development as a main trigger of economic growth.

“[The infrastructure programmes] will trigger economic growth,” Widodo said last December. “But we do not start those projects in mid-year because the absorption of the budget will determine whether or not our economy grows throughout 2015,” he added.

Indonesia’s Vice-President Jusuf Kalla expects that Indonesia’s GDP growth will accelerate soon after several infrastructure projects will have been launched. Such acceleration should happen in the next few quarters, and the annual growth rate is estimated to increase from this year’s target of 5.5 per cent to 5.8 per cent, according to Finance Minister Bambang Brodjonegoro.

Overall, Indonesia estimates that it needs $450 billion over five years for roads, railways, power stations and ports to revive the economy; currently, it can only cover about 30 per cent of that.

Meanwhile, the country’s central bank Bank Indonesia has been maintaining its high interbank interest rate of 7.5 per cent, limiting people’s purchasing power and keeping loans for businesses expensive. However, the high rate is owing to the country’s account deficit and fears that inflation could accelerate, the central bank argues.

One of the results was that the Indonesian rupiah depreciated to 13,630 per US dollar on August 11, dripping by around 10 per cent this year so far, which makes it the second-worst performing currency in Southeast Asia in 2015 only behind the Malaysian ringgit.

During this year’s Asian African Conference Commemoration Indonesia held in April 2015 in Jakarta, a regular event where peace, security and economic development on both continents are discussed, Widodo held talks with Chinese President Xi Jinping, and Japan’s Prime Minister Shinzo Abe on economic matters.

With China’s wages rising and economic growth slowing, Chinese companies have showed more eagerness to invest abroad. Hence, Indonesia’s State-Owned Enterprises Minister Rini Soemarno said the government was considering China’s offer to build a railway as a $50-billion funding commitment. She also told media that China’s offer was attractive because it didn’t require any funding guarantees.

According to Rizal Affandi Lukman, Deputy Minister of International Economic and Financial Cooperation, China is expected to jump from currently being the tenth-biggest investor in Indonesia to the top-five within just five years.

China’s drive to invest in infrastructure through the newly formed Asian Infrastructure Investment Bank, or AIIB, has also been welcomed by Widodo, who remains confident that Indonesia’s economy will double in terms of GDP in 10 to 15 years.

Similarly, Japanese companies are keen to build a mass rapid transit system for Jakarta worth $499 million. Furthermore, Widodo urged a group of Japanese businessmen to invest into Indonesia’s infrastructure on his business trip to Japan in March, promising to settle land disputes that have blocked another Japanese project, a power station in Java.

Widodo also emphasised his commitment to build new transportation infrastructure, including ten new airports and ten new seaports in the country, keeping promises made during his election campaign in 2014.

Reading Time: 3minutesIndonesia’s formerly emerging economy has taken a hit from sluggish exports, high inflation and fewer investments.

Indonesia’s President Joko Widodo believes that now is “the best time to invest” in the country despite its current economic problems. During his first official visit to Singapore end-July, he recalled moments of Indonesia’s crisis in 1997 and claimed that many investors – including many Singaporeans – who stayed invested have gained huge profits today.

By Christin Huang

He advised more than 150 business leaders at an event to “invest early” in Indonesia, as a “new economic cycle is beginning.”

“The social media revolution has begun. The smartphone revolution has begun. Around the world, around the region, and yes – also in Indonesia,” he proclaimed.

But it’s hard for many investors to ignore Indonesia’s lackluster economic performance, especially compared to some other soaring economies in the region. Indonesia posted growth of relatively disappointing 4.7 per cent in the first quarter of 2015, setting the nation off course to meet the International Monetary Fund’s 5.5 per cent growth forecast for 2015.

The relatively low GDP growth rate for Indonesia as a once strongly emerging nation is the result of the strengthening US dollar, weak exports and high domestic interest rates, according to Suryamin, Head of Statistics Indonesia (BPS).

Moreover, Indonesia’s weakening exports are seen as a symptom of the global economic slowdown, as particularly the recent weakness in China – which accounts for one-tenth of Indonesia’s exports – has led to negative side effects, with Indonesia’s exports to China dropping to 7 per cent from 7.4 per cent in the first quarter of 2015. Coal, natural gas and palm oil exports have all been hit.

Widodo predicts that exports will remain weak, but he sees investment opportunities in infrastructure development as a main trigger of economic growth.

“[The infrastructure programmes] will trigger economic growth,” Widodo said last December. “But we do not start those projects in mid-year because the absorption of the budget will determine whether or not our economy grows throughout 2015,” he added.

Indonesia’s Vice-President Jusuf Kalla expects that Indonesia’s GDP growth will accelerate soon after several infrastructure projects will have been launched. Such acceleration should happen in the next few quarters, and the annual growth rate is estimated to increase from this year’s target of 5.5 per cent to 5.8 per cent, according to Finance Minister Bambang Brodjonegoro.

Overall, Indonesia estimates that it needs $450 billion over five years for roads, railways, power stations and ports to revive the economy; currently, it can only cover about 30 per cent of that.

Meanwhile, the country’s central bank Bank Indonesia has been maintaining its high interbank interest rate of 7.5 per cent, limiting people’s purchasing power and keeping loans for businesses expensive. However, the high rate is owing to the country’s account deficit and fears that inflation could accelerate, the central bank argues.

One of the results was that the Indonesian rupiah depreciated to 13,630 per US dollar on August 11, dripping by around 10 per cent this year so far, which makes it the second-worst performing currency in Southeast Asia in 2015 only behind the Malaysian ringgit.

During this year’s Asian African Conference Commemoration Indonesia held in April 2015 in Jakarta, a regular event where peace, security and economic development on both continents are discussed, Widodo held talks with Chinese President Xi Jinping, and Japan’s Prime Minister Shinzo Abe on economic matters.

With China’s wages rising and economic growth slowing, Chinese companies have showed more eagerness to invest abroad. Hence, Indonesia’s State-Owned Enterprises Minister Rini Soemarno said the government was considering China’s offer to build a railway as a $50-billion funding commitment. She also told media that China’s offer was attractive because it didn’t require any funding guarantees.

According to Rizal Affandi Lukman, Deputy Minister of International Economic and Financial Cooperation, China is expected to jump from currently being the tenth-biggest investor in Indonesia to the top-five within just five years.

China’s drive to invest in infrastructure through the newly formed Asian Infrastructure Investment Bank, or AIIB, has also been welcomed by Widodo, who remains confident that Indonesia’s economy will double in terms of GDP in 10 to 15 years.

Similarly, Japanese companies are keen to build a mass rapid transit system for Jakarta worth $499 million. Furthermore, Widodo urged a group of Japanese businessmen to invest into Indonesia’s infrastructure on his business trip to Japan in March, promising to settle land disputes that have blocked another Japanese project, a power station in Java.

Widodo also emphasised his commitment to build new transportation infrastructure, including ten new airports and ten new seaports in the country, keeping promises made during his election campaign in 2014.